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Terry v. Penn Cent. Corp. - 668 F.2d 188 (3d Cir. 1981)

Rule:

The de facto merger doctrine has rarely been invoked by the Pennsylvania courts. Only once has the Pennsylvania Supreme Court made reference to it, in In re Jones & Laughlin Steel Corp., 488 Pa. 524, 412 A.2d 1099 (1980). Even there, the Court’s reference was oblique. It merely cited Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958) for the proposition that shareholders have the right to enjoin “proposed unfair or fraudulent corporate actions.”  The Court of Appeals for the Third Circuit, sitting in diversity in Knapp v. North American Rockwell Corp., 506 F.2d 361 (3d Cir. 1974), made reference to the de facto merger doctrine to hold that a transaction structured as a sale of assets could nevertheless be deemed a merger for purposes of requiring the merging corporation to assume the acquired corporation’s liability for damages to a worker who was injured by a faulty piece of equipment manufactured by the acquired company. Perhaps the broadest application of the doctrine was made in In re Penn Central Securities Litigation, 367 F. Supp. 1158 (E.D.Pa.1973), in which the district court held that the doctrine provided the plaintiffs in that case with standing for a 10b-5 lawsuit alleging fraud and also gave rise to dissent and appraisal rights in a triangular merger situation.

Facts:

The Penn Central Corporation (Penn Central), an appellee in this case, has sought to acquire Colt Industries Inc. (Colt), also an appellee, by merging Colt with PCC Holdings, Inc. (Holdings), a wholly-owned subsidiary of Penn Central. Howard L. Terry and W. H. Hunt, the appellants, were shareholders of Penn Central who objected to the transaction. In a diversity action before the United States District Court for the Eastern District of Pennsylvania, appellants sought injunctive and declaratory relief to enforce voting and dissenters’ rights to which appellants asserted they were entitled. Appellants further sought to enjoin Holdings from proceeding with the proposed merger, and in particular moved to enjoin a vote on the transaction, scheduled for October 29, 1981, by the shareholders of Penn Central. The district court denied appellants’ requests. On appeal, appellants alleged that under the articles of corporation the issuance of secondary stock to newly acquired shareholders required approval by the existing shareholder majority. Moreover, appellants alleged that appellees’ planned merger was “de facto” and thus illegal.

Issue:

Did the “de facto merger” doctrine apply?

Answer:

No.

Conclusion:

The appellate court affirmed the lower court, holding that the "de facto" allegation was flawed because appellants never offered proof of fraud. Further, the existing shareholders would not have lesser right under the proposed merger since there would be no change in their voting rights.

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